Osborne Backs Jail for ‘Reckless’ U.K. Bankers

U.K. Chancellor of the Exchequer George Osborne plans to introduce legislation later this year that would make “reckless” management of lenders a crime and back clawing back bonuses awarded by banks that receive state aid, according to the official. Photographer: Simon Dawson/Bloomberg

July 8 (Bloomberg) -- U.K. Chancellor of the Exchequer
George Osborne backed tougher rules for the banking industry,
including legislation to jail reckless bankers and giving
regulators the power to defer bonuses for as long as 10 years.

In its response to the recommendations of the Parliamentary
Commission on Banking Standards, the government said today it
plans to implement the main findings, with new laws if needed.

“The government is determined to raise standards across
the banking industry to create a stronger and safer banking
system,” Osborne said in a statement. “Cultural reform in the
banking sector marks the next step in the government’s plan to
move the whole sector from rescue to recovery and ensure that
U.K. banks demonstrate the highest standards, and are able to
support business and drive economic growth.”

Pay reform is part of a program of sweeping change proposed
by the commission, a cross-party group of lawmakers set up last
year by Osborne after a series of scandals and five years of
poor returns for the financial industry. The recommendations
being adopted go further than changes introduced by U.K.
regulators after the financial crisis, which forced bankers to
wait as long as five years to get their bonuses.

Osborne plans to introduce legislation later this year that
would make “reckless” management of lenders a crime, meaning
executives of failed firms could face jail time.

The government also “strongly supports” calls that a
substantial part of variable compensation for the highest
earners at banks should be deferred for up to a decade to
reflect the length of time it takes for profits and losses from
transactions to be realized.

Longer Wait

“The introduction of regulatory deferral periods for
remuneration awards has played an important role in
restructuring pay and reducing incentives to take excessive risk
and therefore supporting prudential soundness,” it said.
“Extended deferral periods can help to further improve the
alignment of individual and institutional incentives by ensuring
a longer period during which variable pay can be subject to the
application of malus.”

Firms should nonetheless retain the flexibility to set
deferral periods, it said.

Other suggestions backed by the government include powers
to claw back bonuses awarded by banks that receive state aid and
paying staff in bail-in bonds that convert into capital to
absorb losses, leaving managers exposed to losses if their firm
goes bust.

‘Bad Bank’

The Treasury is examining the case for breaking up Royal
Bank of Scotland Group Plc and hiving off its worst-performing
assets into a “bad bank,” as demanded by the commission.

Osborne plans to introduce amendments to the Financial
Services (Banking Reform) Bill to include some of the
commission’s proposals later this year. Lawmakers are due to
debate the bill today.

Osborne rejects the commission’s call to scrap the body
overseeing the taxpayer stakes in Lloyds Banking Group Plc and
RBS. He is also skeptical about imposing tighter limits on
“leverage,” a key measure restricting a bank’s size relative
to its equity capital, according to a Treasury official.

The recommendations are designed to enhance culture and
standards in banking and “can only do so if implemented as a
package,” Andrew Tyrie, the Conservative Party lawmaker who
heads the commission, said in a statement after Osborne’s
announcement. “The government’s response appears to fall short
on a number of important points,” he said, including
proprietary trading and improving the governance of the Bank of
England.